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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20148
CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1187135
(State of Incorporation) (I.R.S. Employer Identification No.)
12910 Shelbyville Road, Louisville, Kentucky 40243
(Address of principal executive offices)
(502) 244-2420
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ~~X~~ No ~~~~~~
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Class A Stock - 1,701,628 as of
November 11, 2002.
The date of this Report is November 12, 2002.
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Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30 2002 2001
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $ 29,503,837 $ 22,453,896
Premiums ceded (964,938) (868,582)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 28,538,899 21,585,314
Net investment income 4,308,775 4,948,968
Net realized investment losses (2,497,769) (6,398,998)
Other income 374,937 196,669
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 30,724,842 20,331,953
Policy Benefits and Expenses:
Policyholder benefits 14,394,220 13,459,724
Policyholder benefits ceded (1,039,057) (869,942)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 13,355,163 12,589,782
Increase in net benefit reserves 9,796,081 4,410,098
Interest credited on policyholder deposits 572,568 643,148
Commissions 5,577,016 4,903,230
General expenses 5,017,477 4,922,102
Interest expense 234,053 442,205
Policy acquisition costs deferred (2,080,972) (2,687,885)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 1,598,876 1,588,433
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 34,070,262 26,811,113
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax and cumulative effect (3,345,420) (6,479,160)
of a change in accounting principle
Income Tax Benefit (628,000) (1,696,000)
------------------------------------------------------------------------ -------------------- --------------------
Loss before cumulative effect of a $(2,717,420) (4,783,160)
change in accounting principle
Cumulative effect from prior years (since January 1, 1999) of
accounting for embedded options --- (311,211)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (2,717,420) $ (5,094,371)
------------------------------------------------------------------------ -------------------- --------------------
Per Share Amounts:
Loss before cumulative effect of a
change in accounting principle $ (1.58) $ (2.75)
Cumulative effect from prior years (since January 1, 1999) of
accounting for embedded options --- (0.18)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (1.58) $ (2.93)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30 2002 2001
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $ 11,069,060 $ 7,652,167
Premiums ceded (319,665) (297,187)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 10,749,395 7,354,980
Net investment income 1,412,132 1,607,471
Net realized investment losses (701,218) (3,100,898)
Other income 266,107 77,399
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 11,726,416 5,938,952
Policy Benefits and Expenses:
Policyholder benefits 4,597,113 4,248,273
Policyholder benefits ceded (189,383) (318,854)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 4,407,730 3,929,419
Increase in net benefit reserves 4,096,554 1,635,664
Interest credited on policyholder deposits 169,527 229,739
Commissions 2,039,036 1,489,252
General expenses 1,742,364 1,590,419
Interest expense 74,649 127,504
Policy acquisition costs deferred (797,187) (657,524)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 679,222 690,644
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 12,411,895 9,035,117
------------------------------------------------------------------------ -------------------- --------------------
Loss before Income Tax (685,479) (3,096,165)
Income Tax Benefit (213,000) (810,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (472,479) $ (2,286,165)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss Per Common Share $ (0.27) $(1.32)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2002 2001
------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $88,791,034
and $75,872,277 in 2002 and 2001 respectively) $ 91,615,254 $ 77,534,516
Equity securities (cost of $8,231,002 and
$7,055,402 in 2002 and 2001, respectively) 8,973,606 8,116,958
Investment real estate 3,280,652 3,438,345
Mortgage loans on real estate 156,000 156,000
Policy loans 4,127,296 4,136,649
Short-term investments 652,192 652,192
------------------------------------------------------------------------ -------------------- --------------------
Total Investments 108,805,000 94,034,660
Cash and cash equivalents 12,768,616 18,433,626
Accrued investment income 1,372,345 1,390,550
Reinsurance recoverable 2,530,243 2,755,680
Premiums receivable 460,775 215,520
Property and equipment 2,819,191 2,862,727
Deferred policy acquisition costs 9,588,640 8,579,423
Value of insurance acquired 3,748,105 4,177,907
Goodwill 755,782 755,782
Federal income tax receivable 290,015 2,854,933
Other assets 315,837 536,275
------------------------------------------------------------------------ -------------------- --------------------
Total Assets $ 143,454,549 $ 136,597,083
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2002 2001
------------------------------------------------------------------------ -------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $ 99,056,386 $ 89,337,560
Policyholder deposits 15,768,245 15,917,731
Policy and contract claims 1,602,030 1,442,356
Unearned premiums 242,590 252,730
Other 222,908 289,400
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 116,892,159 107,239,777
Notes payable 6,108,334 7,095,834
Accrued expenses and other liabilities 2,197,799 1,748,753
Deferred federal income tax 482,716 510,236
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 125,681,008 116,594,600
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,701,628 and 1,716,815 shares issued and outstanding
in 2002 and 2001, respectively 1,701,628 1,716,815
Additional paid-in capital 7,233,429 7,285,938
Accumulated other comprehensive income 2,313,279 1,757,105
Retained earnings 6,525,205 9,242,625
------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 17,773,541 20,002,483
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $ 143,454,549 $ 136,597,083
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30 2002 2001
------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net loss $(2,717,420) $(5,094,371)
Adjustments to reconcile net loss to cash from operations:
Increase in benefit reserves 9,701,374 4,432,309
Increase (decrease) in claim liabilities 159,674 (465,280)
Decrease in reinsurance recoverable 225,437 152,973
Interest credited on policyholder deposits 572,568 643,148
Provision for amortization and depreciation, net of deferrals (250,520) (830,755)
Amortization of premium and accretion of discount on
securities purchased, net 20,018 (129,103)
Net realized investment losses 2,497,769 6,398,998
(Increase) decrease in accrued investment income 18,205 (38,440)
Change in other assets and liabilities 166,587 (210,473)
Increase (decrease) in deferred federal income tax liability (314,034) 300,000
(Increase) decrease in federal income taxes receivable 2,564,918 (703,431)
Cumulative effect of a change in accounting principle --- 311,211
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by Operations 12,644,576 4,766,786
Cash Flows from Investment Activities:
Cost of securities acquired (48,773,836) (20,797,466)
Investments sold or matured 32,308,112 20,603,453
Investment management fees (45,618) (173,389)
Additions to property and equipment, net (30,347) (182,171)
Other investing activities, net 9,353 79,122
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Investment Activities (16,532,336) (470,451)
Cash Flows from Financing Activities:
Policyholder deposits 588,023 725,417
Policyholder withdrawals (1,310,077) (1,596,451)
Payments on notes payable - bank (987,500) (600,000)
Repurchase of common stock (67,696) (246,225)
------------------------------------------------------------------------ -------------------- --------------------
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (1,777,250) (1,717,259)
------------------------------------------------------------------------ -------------------- --------------------
Net Increase (decrease) in Cash and Cash Equivalents (5,665,010) 2,579,076
Cash and Cash Equivalents at Beginning of Period 18,433,626 20,093,774
------------------------------------------------------------------------ -------------------- --------------------
------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $12,768,616 $22,672,850
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q in conformity with
accounting principles generally accepted in the United States. The accompanying
unaudited condensed financial statements reflect all adjustments which are, in
the opinion of management, necessary to a fair presentation of the results for
the interim periods. All such adjustments are of a normal recurring nature. For
further information, refer to the December 31, 2001 consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K.
Note 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three months
and nine months ended September 30, 2002 and 2001 are as follows:
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------- ----------------- ---------------- -----------------
COMPREHENSIVE INCOME: 2002 2001 2002 2001
------------------------------------------- ---------------- ----------------- ---------------- -----------------
Net Loss $ (472,479) $ (2,286,165) $ (2,717,420) $ (5,094,371)
Net Unrealized gains (losses) on securities 965,148 (227,430) 556,174 2,144,188
------------------------------------------- ---------------- ----------------- ---------------- -----------------
Comprehensive Income (Loss) $ 492,669 $ (2,513,595) $ (2,161,246) $ (2,950,183)
------------------------------------------- ---------------- ----------------- ---------------- -----------------
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS Nos. 137 and 138. This statement
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet at their fair value, and sets forth the manner in which gains
or losses thereon are to be recorded. The treatment of such gains and losses is
dependent upon the type of exposure, if any, for which the derivative is
designed as a hedge. Currently, the Company has not designated any derivatives
as hedges. In accordance with SFAS 133, as of January 1, 2001, the Company
recorded a $311,211 transition adjustment loss. This adjustment represents the
cumulative market value change (since January 1, 1999) of options embedded
within convertible bonds, along with a recalculation of discount accretion for
the related host bonds and corresponding income tax impacts. The net transition
adjustment includes a $539,090 gross market value decline, $67,558 of discount
accretion, and a $160,321 income tax benefit.
Note 4 - NET REALIZED INVESTMENT GAINS AND LOSSES, NET OF EXPENSES
The Company recorded pretax reductions to the carrying value of available for
sale securities totaling $2,095,000 and $2,634,000 for the nine months ended
September 30, 2002 and 2001, respectively, relating to declines in value which
were considered by management to be other than temporary. These amounts are
reported as additions to net realized investment losses. The Company also
includes certain direct, incremental investment management fees with net
realized investment losses presented in the Condensed Consolidated Statements of
Income. Such costs are based directly on or, are primarily associated with,
realized capital gains and losses. Costs included with realized investment
losses totaled $23,000 and $54,000 for the nine months ended September 30, 2002
and 2001, respectively.
Part I; Item 1 (continued)
Note 5 - INCOME TAXES
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Note 6 - SEGMENT INFORMATION
The Company's operations are managed along five principal insurance product
lines: Home Service Life, Broker Life, Preneed Life, Dental, and Other Health.
Products in all five lines are sold through independent agency operations. Home
Service Life consists primarily of traditional life insurance coverage sold in
amounts of $10,000 and under to middle and lower income individuals. This
distribution channel is characterized by a significant amount of agent contact
with customers throughout the year. Broker Life product sales consist primarily
of simplified issue and graded-benefit policies in amounts of $10,000 and under.
Other products in this segment, which are not aggressively marketed, include:
group life, universal life, annuities and participating life coverages. Preneed
Life products are sold to individuals in connection with prearrangement of their
funeral and include single premium and multi-pay policies with coverages
generally in amounts of $10,000 and less. These policies are generally sold to
older individuals at increased premium rates. Dental products are term coverages
generally sold to small and intermediate size employer groups. Other Health
products include various accident and health coverages sold to individuals and
employer groups. Segment information as of September 30, 2002 and 2001, and for
the periods then ended is as follows:
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------- ----------------- ---------------- -----------------
REVENUE: 2002 2001 2002 2001
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 2,405,316 $ 2,346,090 $ 7,035,222 $ 7,029,071
Broker Life 1,485,669 1,684,895 4,531,884 5,078,572
Preneed Life 6,092,054 2,763,516 14,445,028 7,430,929
Dental 2,077,379 1,884,305 6,120,719 6,057,285
Other Health 367,216 361,044 1,089,758 1,135,094
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals 12,427,634 9,039,850 33,222,611 26,730,951
Net realized investment losses (701,218) (3,100,898) (2,497,769) (6,398,998)
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Total Revenue $ 11,726,416 $ 5,938,952 $ 30,724,842 $ 20,331,953
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Below are the net investment income amounts which are included in the revenue
totals above.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------- ----------------- ---------------- -----------------
NET INVESTMENT INCOME: 2002 2001 2002 2001
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 435,698 $ 526,394 $ 1,368,774 $ 1,638,758
Broker Life 527,574 661,800 1,669,919 2,060,052
Preneed Life 425,155 388,358 1,190,448 1,150,634
Dental 5,454 7,907 19,762 27,694
Other Health 18,251 23,012 59,872 71,830
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals $ 1,412,132 $ 1,607,471 $ 4,308,775 $ 4,948,968
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Part I; Item 1 (continued)
The Company evaluates performance based on several factors, of which the primary
financial measure is segment profit. Segment profit represents pretax earnings,
except that net realized investment gains and interest expense are excluded. A
significant portion of the Company's realized investment gains and losses are
generated from investments in equity securities. The equities portfolio averaged
(on a cost basis) $7,179,000 and $11,370,000 during the nine months ended
September 30, 2002 and 2001, respectively.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------- ----------------- ---------------- -----------------
SEGMENT PROFIT (LOSS): 2002 2001 2002 2001
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 145,625 $ 42,374 $ (2,227) $ 215,862
Broker Life (49,071) 181,013 (192,069) 192,515
Preneed Life (163,181) (101,278) (512,479) (170,774)
Dental 131,685 81,070 236,903 165,768
Other Health 25,330 (70,942) (143,726) (41,328)
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals 90,388 132,237 (613,598) 362,043
Net realized investment losses (701,218) (3,100,898) (2,497,769) (6,398,998)
Interest expense 74,649 127,504 234,053 442,205
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Loss before income tax
and cumulative effect of a change
in accounting principle $ (685,479) $ (3,096,165) $ (3,345,420) $ (6,479,160)
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Depreciation and amortization amounts below consist of depreciation expense
along with amortization of the value of insurance acquired and deferred policy
acquisition costs. Goodwill amortization of $23,000 and $74,000 is also included
for the three months and nine months, respectively, ended September 30, 2001. As
further described in Note 8, beginning in 2002, goodwill amortization is no
longer permitted.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------- ----------------- ---------------- -----------------
DEPRECIATION AND AMORTIZATION: 2002 2001 2002 2001
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 250,420 $ 352,726 $531,330 $ 645,492
Broker Life 119,652 158,360 395,604 488,787
Preneed Life 363,395 240,451 827,933 625,750
Dental 13,946 18,005 43,638 54,011
Other Health 9,542 10,677 31,952 43,089
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals $ 756,955 $ 780,219 $1,830,457 $1,857,129
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
----------------- ----------------
September 30, December 31,
ASSETS: 2002 2001
--------------------------------------------- ----------------- ----------------
Home Service Life $44,606,794 $ 44,818,038
Broker Life 53,422,217 54,954,194
Preneed Life 42,941,370 34,138,535
Dental 558,511 726,728
Other Health 1,925,657 1,959,588
--------------------------------------------- ----------------- ----------------
Segment Totals $143,454,549 $ 136,597,083
--------------------------------------------- ----------------- ----------------
Part I; Item 1 (continued)
Note 7 - LITIGATION
United Liberty Life Insurance Company ("United Liberty"), which the Company
acquired in 1998, is defending an action in an Ohio state court brought by two
policyholders. The Complaint refers to a particular class of life insurance
policies that United Liberty issued over a period of years ending around 1971.
It alleges that United Liberty's dividend payments on these policies from 1993
through 1999 were less than the required amount. It does not specify the amount
of the alleged underpayment but implies a maximum of about $850,000. The
plaintiffs also allege that United Liberty is liable to pay punitive damages,
also in an unspecified amount, for breach of an implied covenant of good faith
and fair dealing to the plaintiffs in relation to the dividends. The action has
been certified as a class action on behalf of all policyholders whose policies
were issued in Ohio and were still in force in 1993. United Liberty has denied
the material allegations of the Complaint and is defending the action
vigorously. Pre-trial discovery is continuing. United Liberty has filed a motion
for summary judgment to which the plaintiffs have not yet responded. At United
Liberty's request, an initial mediation session has been completed and
negotiations are continuing. As a pre-requisite for the mediation, United
Liberty offered to settle the matter for payments over time, which would include
attorneys' fees, and which would be contingent upon an exchange or reformation
of the insurance policies currently owned by the members of the class. At this
stage of the litigation, the Company is unable to determine whether an
unfavorable outcome of the action is likely to occur or, alternatively, whether
the chance of such an outcome is remote. Therefore, at this time, management has
no basis for estimating potential losses, if any. In addition, the Company is
party to other lawsuits in the normal course of business. Management believes
that recorded claims liabilities are adequate to ensure that these other suits
will be resolved without material financial impact to the Company.
Note 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company adopted the new rules on accounting for goodwill and
other intangible assets in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to increase net income
approximately $90,000 ($0.05 per share) per year. During 2002, the Company
completed the first step in evaluating the potential impairment of its goodwill.
Based on the results of this test, there was no impairment.
Below is a proforma illustration of earnings adjusted to exclude the goodwill
amortization recorded during 2001.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------- ----------------- ---------------- -----------------
DESCRIPITON: 2002 2001 2002 2001
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Net Loss excluding goodwill
amortization $ (472,479) $ (2,263,661) $ (2,717,420) $(5,020,861)
Goodwill amortization --- 22,504 --- 73,510
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Net Loss - as reported $ (472,479) $ (2,286,165) $ (2,717,420) $ (5,094,371)
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Net Loss per Share:
Excluding goodwill amortization $ (0.27) $ (1.31) $ (1.58) $ (2.87)
As reported $ (0.27) $ (1.32) $ (1.58) $ (2.93)
Total goodwill outstanding at September 30, 2002 is $756,000 with $304,000 allocable to Broker Life, $270,000 to Home Service Life,
and $182,000 to Preneed Life.
Part I; Item 1 (continued)
Note 9 - DEBT
The Company did not meet a bank loan covenant relating to a ratio of outstanding
bank debt to adjusted earnings as of September 30, 2002. The Company has begun
an evaluation of strategic alternatives necessary for returning to compliance
and has implemented certain measures designed to increase product margins and
reduce operating expenses. In addition, the Company plans to raise approximately
$2 million of cash from subordinated debt or other sources, with the funds used
as a capital contribution to its principal insurance subsidiary, Citizens
Security Life Insurance Company. Based on these actions, the lender has waived
the covenant violation for the third quarter of 2002.
Part I; Item 2 - Management's Discussion and Analysis
FINANCIAL POSITION. Shareholders' equity totaled $17,774,000 and $20,002,000 at
September 30, 2002 and December 31, 2001, respectively. These balances represent
a 2.5% increase and an 11.1% decrease for the three months and nine months ended
September 30, 2002, respectively. As described above, comprehensive income
(loss) totaled $492,000 and $(2,514,000) for the three months ended September
30, 2002 and 2001, respectively. For the nine months ended September 30, 2002
and 2001 comprehensive losses totaled $(2,161,000) and $(2,950,000),
respectively. A significant portion of the 2002 comprehensive loss is
attributable to changes in the value of the Company's fixed maturity and equity
portfolios. As of September 30, 2002 and December 31, 2001, equity securities
comprised approximately 6% of the Company's total assets, and 50% and 41%,
respectively of shareholders' equity. Accordingly, as also described below, the
Company's financial position can be significantly affected by movements in the
equities markets. Equity portfolio positions increased $1,176,000 on a cost
basis and $857,000 on a market value basis, during the first nine months of
2002. Fixed maturity portfolio positions increased $12,919,000 on an amortized
cost basis and $14,081,000 on a market value basis during the same period. Cash
and cash equivalent positions decreased by $5,665,000, to $12,769,000 during the
nine months ended September 30, 2002 and comprise approximately 8.9% and 13.5%
of total assets at September 30, 2002 and December 31, 2001, respectively.
Equity markets continue to be highly volatile and have declined during 2002 to a
greater extent than previously anticipated. In addition, interest yields on
fixed maturity investments have also declined during 2002 to a greater extent
than previously anticipated. Accordingly, although the Company had maintained
significant cash and cash equivalent balances in anticipation of potentially
rising interest rates, the significant decline in short-term rates has and,
continues to adversely impact the Company's investment portfolio yield and
operating earnings. The Company's 2002 investment impairments include writedowns
of certain highly publicized companies such as Cablevision ($362,000),
MCI/Worldcom ($348,000) and Adelphia ($145,000). Due to continuing accounting
investigations at a wide range of companies and the generally adverse economic
environment, the Company cannot predict the potential of future investment
impairments. The 2002 environment described above has produced a higher level of
qualitative investment risk. However, measures of quantitative risk per unit of
investment are not believed to have changed significantly from those previously
disclosed in the Company's 2001 Form 10-K
OPERATIONS. Net premiums and other considerations increased $3,394,000 or 46%
during the three months ended September 30, 2002 compared to the three months
ended September 30, 2001 and increased $6,954,000, or 32% during the first nine
months of 2002 compared to the first nine months of 2001. For the first nine
months of 2002, Preneed Life, Home Service Life, and Dental premium increases
were $6,888,000, $222,000, and $71,000, respectively, while Broker Life
experienced a modest decrease. The Preneed Life segment growth is attributable
primarily to continued expansion into independently owned funeral homes and a
joint marketing agreement with a casket distributor. Preneed Life growth also
accounts for approximately eighty-five percent of the Increase in Net Benefit
Reserves for nine months ended September 30, 2002. Broker Life and Dental
premium reductions are primarily attributable to increased competition in the
broker market, and the mid-2001 loss of certain dental groups which had above
average claim rates. The Other Health segment represents approximately 4% of
total premium.
Pretax earnings (loss) (before the cumulative effect of a new accounting
principle) improved $2,411,000 to $(685,000) for the three months ended
September 30, 2002 compared to the third quarter of 2001, primarily due to an
approximate $2,400,000 decrease in realized investment losses along with
improved segment results. Pretax Segment Profit (Loss) (excluding realized
investment gains and interest expense) for the three months ended September 30,
2002 was $90,000, compared to $132,000 for 2001. This change is due primarily to
higher Broker Life mortality and lower interest yields, partially offset by
improved Home Service Life mortality and Other Health morbidity. The Pretax
Segment Profit (Loss) for the nine months ended September 30, 2002 and 2001 were
$(614,000) and $362,000, respectively. This decrease resulted primarily from
lower interest and higher disability claim levels. Below are the approximate,
annualized pretax investment income and total return yields for the nine months
ended September 30, 2002 and 2001.
Part I; Item 2 (continued)
----------------- -----------------
Nine Months Ended September 30 2002 2001
-------------------------------------------- ----------------- -----------------
Investment Income $ 4,308,775 $ 4,948,968
Realized and Unrealized Losses (1,654,740) (3,821,408)
-------------------------------------------- ----------------- -----------------
Total Return $ 2,654,035 $ 1,127,560
-------------------------------------------- ----------------- -----------------
Average Cash and Investments $ 115,261,875 $ 113,278,571
Investment Income Yield - Annualized 4.98% 5.82%
Total Return - Annualized 3.07% 1.33%
The change in the Company's effective income tax rate is due to the lack of tax
loss carryback potential for a portion of the Company's operations.
CASH FLOW, LIQUIDITY AND RATINGS. Cash flow from operations totaled $12,645,000
for the nine months ended September 30, 2002 compared to $4,767,000 for the same
period in the prior year. This increase is primarily attributable to growth in
Preneed Life business. The $16,532,000 of cash used by investing activities for
the nine months ended September 30, 2002 resulted primarily from investing the
proceeds of Preneed Life sales and $5,665,000 of cash and short term funds into
fixed maturity securities. The $1,777,000 of cash used in financing activities
during the first three quarters of 2002 is primarily attributable to bank loan
principal repayments along with annuity and Universal Life account withdrawals.
Due to continued investment losses and earnings pressure from lower yields on
investments and cash equivalents, and in consideration of bank loan covenants,
the Company has begun evaluating options for strengthening its overall financial
position, including reassessing the strategic value of its business segments.
Initial steps have been taken to improve product pricing margins and reduce
operating costs. Continuation of existing earnings trends could also prompt
state insurance department regulatory action and/or rating agency reevaluations.
However, in an effort to maintain its existing rating, the Company plans to
contribute approximately $2 million of statutory capital to its principal
insurance subsidiary, Citizens Security Life Insurance Company. The Company
expects to obtain these funds from a subordinated borrowing or other sources.
FORWARD-LOOKING INFORMATION. All statements, trend analyses and other
information contained in this report relative to markets for the Company's
products and trends in the Company's operations or financial results, as well as
other statements including words such as "anticipate", "believe", "plan",
"estimate", "expect", "intend", and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things:
|X| the market value of the Company's investments, including stock market
performance and prevailing interest rate levels;
|X| customer and agent response to new products, distribution channels
and marketing initiatives, including exposure to unrecoverable advanced
commissions;
|X| mortality, morbidity, lapse rates, and other factors which may affect
the profitability of the Company's insurance products;
|X| regulatory changes or actions, including those relating to regulation
of insurance products and companies;
|X| ratings assigned to the Company and its subsidiaries by independent
rating organizations which the Company believes are important to the
sale of its products;
|X| general economic conditions and competition which may affect the
Company's ability to sell its products;
|X| the Company's ability to achieve anticipated levels of operating
efficiencies and meet cash requirements based upon projected liquidity
sources;
Part I; Item 2 (continued)
|X| unanticipated adverse litigation outcomes; and
|X| changes in the Federal income tax laws and regulations which may affect
the relative tax advantages of some of the Company's products.
There can be no assurance that other factors not currently anticipated by
management will not also materially and adversely affect the Company's results
of operations.
Part I; Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The primary changes in quantitative market risks during the nine months ended
September 30, 2002 are discussed in Part I, Item 2 above.
Part I; Item 4 - Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on an evaluation of the
Company's disclosure controls and procedures within the past 90 days, the
Company has concluded that such controls and procedures provide reasonable
assurance that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Company's principal executive
and financial officers.
CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Company's internal controls or changes in other factors that could significantly
affect these controls subsequent to their evaluation, nor has the Company
implemented any corrective actions regarding significant deficiencies or
material weaknesses in internal controls.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: See Exhibit Index enclosed.
b). Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CITIZENS FINANCIAL CORPORATION
/s/ Darrell R. Wells
By:
-----------------------------------------------------
Darrell R. Wells
President and Chief Executive Officer
/s/ Brent L. Nemec
By:
-----------------------------------------------------
Brent L. Nemec
Treasurer and Principal Accounting Officer
Date: November 12, 2002
Part II - Other Information (continued)
Certification of Principal Executive Officer
Certification for Quarterly Report on Form 10Q
I, Darrell R. Wells, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Citizens Financial
Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Signature and Title: /s/ Darrell R. Wells - CEO Date: 11/12/2002
-------------------------- -----------------
Part II - Other Information (continued)
Certification of Principal Financial Officer
Certification for Quarterly Report on Form 10Q
I, Brent L. Nemec, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Citizens Financial
Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Signature and Title: /s/ Brent L. Nemec - CFO Date: 11/12/2002
----------------------------- -----------------
EXHIBIT INDEX
------------------ -------------------------------------------------------------
Exhibit No. Description
------------------ -------------------------------------------------------------
11 Statement re: computation of per share earnings
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
EXHIBIT 11
Citizens Financial Corporation and Subsidiaries
Computation of Per Share Earnings
(Unaudited)
Nine Months Ended September 30 2002 2001
--------------------------------------------------------------------------- ----------------- ----------------
Numerator(s):
Loss before cumulative effect of a
change in accounting principle $ (2,717,420) $ (4,783,160)
Cumulative effect of a change in accounting principle --- (311,211)
--------------------------------------------------------------------------- ----------------- ----------------
Net Loss $ (2,717,420) $ (5,094,371)
Denominator:
Weighted average common shares 1,716,477 1,747,087
Earnings Per Share:
Loss before cumulative effect of a
change in accounting principle $ (1.58) $ (2.75)
Cumulative effect of a change in accounting principle --- (0.18)
--------------------------------------------------------------------------- ----------------- ----------------
Net Loss $ (1.58) $ (2.93)
Three Months Ended September 30 2002 2001
--------------------------------------------------------------------------- ----------------- ----------------
Numerator:
Net Loss $ (472,479) $ (2,286,165)
Denominator:
Weighted average common shares 1,715,811 1,733,715
Earnings Per Share:
Net Loss $ (0.27) $ (1.32)
EXHIBIT 99.1
Citizens Financial Corporation and Subsidiaries
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q of
Citizens Financial Corporation (the "Company") for the quarterly period ended
September 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report") I, Darrell R. Wells, Chief Executive Officer of the
Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations
of the Company.
By: /s/ Darrel R. Wells
-----------------------------------------------------
Darrell R. Wells
Chief Executive Officer
Date: November 12, 2002
--------------------------------------------------------------------------------
EXHIBIT 99.2
Citizens Financial Corporation and Subsidiaries
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q of
Citizens Financial Corporation (the "Company") for the quarterly period ended
September 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report") I, Brent L. Nemec, Vice President and Chief Financial
Officer of the Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
1. The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations
of the Company.
By: /s/ Brent L. Nemec
-----------------------------------------------------
Brent L. Nemec
Chief Financial Officer
Date: November 12, 2002